Answer Question 8 only
Problems J. WASHAM CALCULATORS 2011 2007 $75 ASSUMPTIONS (current assets shaded) Cash & Equivalents Accounts Receivable Inventory Net Fixed Assets Total Assets 2008 $75 400 BALANCE SHEETS 2009 2010 $90 $100 600 550 $100 300 500 250 150 250 350 250 525 540 465 575 $1,300 610 $1,650 $1,050 $1,440 $1,315 $125 $250 $225 $200 (current liabilities shaded) Accounts Payable Notes Payable Accrued Operating Exp. Long-Term Debt $175 162 165 178 136 99 60 161 165 89 76 500 400 300 100 50 200 402 757.2 890.2 Shareholders Equity Total Liabilities & NW 890.2 $1,315 $1,050 $1,300 $1,650 $1,440 $1,500 600 600 35 $2,250 900 797 50 Revenues (Sales) Cost of Goods Sold Operating Expenses Depreciation Interest Taxes Net Profit Dividends INCOME STATEMENTS $3,000 $2,000 $1,500 1,200 800 600 895 750 725 65 70 75 28 25 10 325 142 36 30 33 94 188 141 282 487.2 213 54 40 80 132 80 54 6. The assistant treasurer of Monroe Tires, Inc., is trying to determine what the appropriate cash return level should be. The company's cash balances have been fluctuating wildly because of unpredictable and wide-ranging receipts and disbursements. The best estimate of annual disbursements is $5,000,000. The investment broker charges $75 per securities transaction. Short-term investment interest rates are 12 percent. The company does not mind a $0 cash balance but does not want the balance to be negative. Monroe's assistant treasurer (see problem 6) estimates the variance of daily net cash flows to be $5,000,000. Again, using a LCL of $0: a. What should the cash return level be, using the Miller-Orr model? b. What is your estimate of the average cash balance if the Miller-Orr calculation is used to set the cash return level? C. How do you explain your finding in part a to the assistant treasurer, who wants to know how to use the information provided by the model? d. If the variance of daily net cash flows is $10,000,000 instead of $5,000,000, how does this change the answer determined in part a? Is the cash return level double your earlier result? How do you interpret this? Problems J. WASHAM CALCULATORS 2011 2007 $75 ASSUMPTIONS (current assets shaded) Cash & Equivalents Accounts Receivable Inventory Net Fixed Assets Total Assets 2008 $75 400 BALANCE SHEETS 2009 2010 $90 $100 600 550 $100 300 500 250 150 250 350 250 525 540 465 575 $1,300 610 $1,650 $1,050 $1,440 $1,315 $125 $250 $225 $200 (current liabilities shaded) Accounts Payable Notes Payable Accrued Operating Exp. Long-Term Debt $175 162 165 178 136 99 60 161 165 89 76 500 400 300 100 50 200 402 757.2 890.2 Shareholders Equity Total Liabilities & NW 890.2 $1,315 $1,050 $1,300 $1,650 $1,440 $1,500 600 600 35 $2,250 900 797 50 Revenues (Sales) Cost of Goods Sold Operating Expenses Depreciation Interest Taxes Net Profit Dividends INCOME STATEMENTS $3,000 $2,000 $1,500 1,200 800 600 895 750 725 65 70 75 28 25 10 325 142 36 30 33 94 188 141 282 487.2 213 54 40 80 132 80 54 6. The assistant treasurer of Monroe Tires, Inc., is trying to determine what the appropriate cash return level should be. The company's cash balances have been fluctuating wildly because of unpredictable and wide-ranging receipts and disbursements. The best estimate of annual disbursements is $5,000,000. The investment broker charges $75 per securities transaction. Short-term investment interest rates are 12 percent. The company does not mind a $0 cash balance but does not want the balance to be negative. Monroe's assistant treasurer (see problem 6) estimates the variance of daily net cash flows to be $5,000,000. Again, using a LCL of $0: a. What should the cash return level be, using the Miller-Orr model? b. What is your estimate of the average cash balance if the Miller-Orr calculation is used to set the cash return level? C. How do you explain your finding in part a to the assistant treasurer, who wants to know how to use the information provided by the model? d. If the variance of daily net cash flows is $10,000,000 instead of $5,000,000, how does this change the answer determined in part a? Is the cash return level double your earlier result? How do you interpret this
